In Part 1, Austin Passamonte explains how discipline in your money management can help you avoid the various mental and emotional pitfalls that will lose you money. Click here to read Part 1.
Riding The Emotional Chip-Stack Curve
Any performance-based pursuit, cards and trading (amongst others) included have the human error factor involved. Let’s face it: if human error weren’t a natural part of trading, everyone would earn millions. Financial markets would cease to exist. Those top-performing CTAs would not peak out at 200+% annual. It would be 2,000+% and then 20,000% and then 2,000,000% annual returns…now wouldn’t it? Or else why wouldn’t it? The S&P 500 index is liquid enough for any single top-performing trader to run $1mil to $48mil based on the linear scale logged above. The S&P 500 index is liquid enough for any single top-performing trader to run $2mil to $96mil based on the linear scale logged above. The overall market would not change one iota if you yourself alone managed to accomplish that in 2010.
The only single limiting factor for top echelon traders that prevents them from draining the trade exchange’s bones dry is human error. We all do it. None of us can escape it. Any of us can limit it. In many ways.
Intraday traders naturally assume that in order to succeed, in order to achieve they pass every test, win every game, call all the price turns, execute perfectly. “Trade well and the money will follow” or “trade every signal and forget about the equity curve” are oft hashed & rehashed. Mechanically that may or may not be true, subject to debate for another time. Realistically, the dual factors of market and human behavior dictate otherwise. There is a limited amount of profit potential inside each individual trading session. It varies, but over long periods of time there are few real chances for directional swings amidst much sideways “noise”. If that weren’t true, many traders would rake in enormous totals of index-point profits day after day. Now wouldn’t they? If profit opportunity was abundant and random noise was scarce, whom amongst us in this profession would not absolutely kill the markets day after day after day?
All those suppositions about “trading every wiggle & jiggle in the tape = max profit results” are false. Measurably false. If that general concept were even remotely true, why don’t the top-performing traders average +20pts to +40pts per ES contract traded… each and every day? With all of the various price gyrations offered in a symbol with plenty of liquidity, why then do the top-echelon performers average fractions of an index point per contract profits, per day? Yes, you read that correctly: fractions of an ES index point per contract, per day is what the top-earning CTA funds actually realize when you break down results. So the fallacy about “trade every signal all day, every day and money will follow” has some obvious fatal flaws. What are they?
First of all, no trader on earth prevails every day. Many have put together long streaks of profitable consecutive sessions, but everyone experiences losses somewhere along the line. At times you’ll read about traders having x-consecutive winning days or better said, non-losing days in long streaks. What is left out of those reports are the times where said traders dig some pretty big holes intraday. Unrealized losses measured at day’s end can be large, but the trader in question manages to somehow trade their way back to breakeven or slightly better.
Meanwhile, traders who target bigger chunks of profit per trade from the market experience days where price movement simply doesn’t offer any potential for that. There were several opportunities in such days to close out unrealized gains for no loss or slight profit results overall. If said trader makes a habit of doing that, they are no longer following their trade-management plan of targeting bigger chunks of price movement for profit. Before any profitable trade can cover substantial distance, it must first wiggle a little ways into the black. Right? Sadly, there is no consistent way of telling exactly which trades will stall out at small profits before reversing back versus the trades which eventually run deep according to plan.
And those are the key words here: according to plan. Traders who make the business decision to trade less and earn more likewise make the conscious decision to pass up +2pt ES profits when the management plan calls for holding until +4pts or greater for execution. Those trades which fit the business plan description cannot ever reach +4pts, +6pts, +8pts or +12pts if prematurely exited at +2pts every time. Now can they?
So intraday traders can skew their trade management plans toward trading not-to-lose, aka finishing with nil or small gains and calling that a victory OR they can skew their trade management plans toward trading for targeted gains with acceptance of missing that mark completely on some occasions.
There is a fundamental and permanent disconnect between machine-like trading performance and human-trader performance. Machines do not experience distractions of any kind. Machines do not require sleep, do not experience mood swings or outside influences on their lives that directly impact job/task performance. Humans simply do not behave machine-like for months and years on end because we are human. All of the factors involved outside of emotionless, mechanized trade operation do exist, do play a role and do impact everyone’s bottom line. There is no way to eliminate all outside factors such as personal illness, lack of sleep, family or relationship distractions, technology glitches (power outage, trade platform outages, balky computers, dropped internet access, etc) and many other real-life factors impacting a person of any profession.
Let’s face it… a lot of everyday factors in life have a direct impact on how we think and feel. If you believe that is different for the biggest, most successful traders as opposed to everyone else, think again. All of us are human, regardless of market experience or experiences. Learning to operate during periods of outside stress or distress is what separates experienced traders from those aspiring to get there. Learning to step away from active trading when outside influences dampen your mental edge is a key, critical part of discretionary trading success.
Just because we choose to be traders instead of any other profession AND the idea that traders must be emotionless machines to perform does not mean it therefore becomes easily possible. Any performance-based professional, not the least of which are professional card players (gamblers) understand that self-control is a critical factor in their winning performance or lack thereof. Pro gamblers measure for and immediately recognize the symptoms of going on tilt, take necessary steps to avert that from sabotaging progress. As part of that distinctive group, traders need to be aware of same.
Short-term traders who subject themselves to the constant daily ritual of trying to squeezing every potential-profits drop sooner or later find themselves drained by the process. Slowly but surely they succumb to burnout and sub-performance results quickly follow. That is an undeniable truth when it comes to short-term discretionary trading. If we hold ourselves accountable to standards of perfection, who among us will measure out with high scores? Nobody.
Yes the given financial market(s) we choose to trade offer a lot more profit potential than we ever manage to capture. Yes it’s basic human nature to look back in hindsight and see where we could have captured more. Yes it will always be our nature to strive for greater efficiency and effectiveness in making that happen. But along the way from here to there, let’s be careful not to place too much internal pressure on ourselves every minute of the day.
Show me any high-ranked professional gambler and you are showing all of us someone who has learned to manage themselves properly and effectively in all situations they might face. The business of self-management, the act of “tilt control” is keeping a mental meter on your own mental state at all times. Are you operating at normal to peak efficiency? Are you in harmony with the flow of horse races – cards – trade charts in front of you? Good. Keep pressing the pedal. Are you at odds with or out of sorts for any reason(s) at all? Equally good to know: step aside, pull your chips (and park your trade-entry ladder) until those adverse conditions can be reined in and negated.
Taught Versus Learned
I firmly believe that anyone without exception can be taught how to read market direction, how to read pending price action and how to find effective trend-entry points in a short period of time. For those who haven’t mastered those skill sets yet, the good news is you can accomplish that with relative ease. But, learning to juggle and manage the constant variables discussed above (and likewise many that were not) is the difference in results at days end reflected in our trading account balances. Knowing which way a market is going and where to enter trades accordingly is a critical step. Failure to get that one right, and nothing else matters past there.
However, there is a whole lot more to playing this game than that. Learning to manage live trades and manage yourself accordingly each step of the way is exactly that: on the job learning experience. None of that can be taught to anyone. Certain factors can be coached, but the actual learning part is 100% dependent on oneself. Too many aspiring traders set themselves up for certain failure by thinking they can learn everything needed to know like it’s some sort of recipe to bake a cake. Instead, learning to trade is akin to learning the craft of being a master baker. Dealing with all of the various aspects and nuances of what can happen with different recipes in different kitchen environments is the difference between baking a good cake versus baking every cake tastefully and successfully.
Anyone can be taught the easy steps to baking a cake. Repeat that process time and again, day after day with all recipes in varied circumstances is the act of learning to bake.
Low Bar Is A High Bar
Not many (if any) professional traders are able to achieve 900+% annualized returns even one time in their career, let alone consistently. The reasons why have nothing to do with mathematical progression. The reasons why have everything to do with human limitations. Focus on managing the human aspect part is a direct affect on shoring up the bottom line of performance. Trading for bite-sized goals, calling it an early day aka “quitting too soon”, walking away from live trades or even part of a day are all different aspects of self-management. Instead of striving to grasp the brass ring each and every day, learning how to take one or two steps up the ladder will tilt the odds heavily in our favor over time.
Austin Passamonte is a full-time professional trader who specializes in all commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets